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Fed’s Lockhart Says More Bond Buying Would Pose Risk Inflation Will Rise

Federal Reserve Bank of Atlanta President Dennis Lockhart said he is concerned that a new round of asset purchases by the Fed would fuel inflation while failing to spur lending.

“I’m cautious about doing more involving expansion of the Fed’s balance sheet,” Lockhart said today in a speech in Atlanta. “Precisely because I see the transmission mechanism of monetary policy through credit channels as constricted, I have my doubts that the gains from such a policy action taken in the near term would outweigh the longer-term potential costs, including the risk to the Fed’s medium-term inflation outlook.”

Fed Chairman Ben S. Bernanke repeated in congressional testimony today that maintaining monetary stimulus is warranted even as the unemployment rate falls and rising oil prices may cause inflation to rise temporarily. Policy makers, who next meet on March 13, said in January that economic slack and subdued inflation are likely to warrant exceptionally low rates through at least late 2014, extending a previous date of mid- 2013.

More bond purchases wouldn’t be appropriate now, Lockhart told reporters after his speech. “The onset of recessionary conditions and movement in the direction of deflation” would be conditions that could lead to more easing, Lockhart said.

First-quarter economic growth will probably be “softer” than the fourth quarter outcome, he said, adding that higher gasoline prices pose a risk to his growth and inflation forecasts this year.

Weakening Economy

“There is a rather high correlation between sustained spikes in gasoline prices and the onset of recessionary conditions or the weakening of the economy,” he told reporters.

The U.S. economy is expanding at a “moderate pace,” Lockhart said in his speech, echoing a Fed report yesterday that the U.S. economy grew at a “modest to moderate pace” in January and early February, including “somewhat faster” growth in the Atlanta region. The report, the Beige Book survey of regional anecdotes, is published two weeks before the Federal Open Market Committee meets to set monetary policy.

“I continue to think the benefits of the low rate policy outweigh the costs,” Lockhart said at the Atlanta Fed’s banking-outlook conference. “A realistic assessment of the challenges associated with closing the employment gap call for sustained extraordinary support for what is, like it or not, a gradual process.”

Low Rates

Credit markets remain somewhat impaired, meaning the Fed’s low rates haven’t spurred as much lending even among healthy borrowers, Lockhart said, singling out the mortgage market as a particular problem.

“Low funding costs and abundant bank reserves produced by monetary policy still have not resulted in significant, broad- based loan growth,” he said. “Still, as you are aware, we are starting to see some movement in the right direction,” with U.S. banks “issuing loans at the fastest rate in about four years. But it’s too early to claim victory for lending.”

The U.S. economy is likely to expand at about a 2 percent rate this quarter and 2.5 percent to 3 percent this year, Lockhart said. Inflation is tracking “price stability” and expectations for prices are “stable,” he said.

“While growth is proceeding at a moderate pace, the question of sustainability continues to hang in the air,” Lockhart said. “There remain significant levels of unused and underutilized resources in the economy, especially human resources.”

Stocks Rise

The Standard & Poor’s 500 Index rose 0.6 percent to 1,374.34 at 2:36 p.m. in New York, while the yield on the 10- year Treasury note increased seven basis points, or 0.07 percentage point, to 2.04 percent.

The Fed pushed down its target interest rate close to zero in December 2008 and has engaged in two rounds of asset purchases totaling $2.3 trillion to boost the economy. Fed officials in January were keeping open the option of a third round of bond purchases.

Lockhart, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy, with Lockhart voting this year. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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